Only Tax Cuts Work in the Long Run
I was asked several times this past week about the presidential candidates and their plans to revive the economy. How the candidates would get us out of recession is largely irrelevant. After all, whoever wins the election will not actually enter the White House until a year from now. Hopefully, the recession will be over by then.
I know that not everyone believes we are actually in a recession, but whether we are or aren't is also largely irrelevant. The fact is that economic growth has slowed tremendously and some regions of the country are experiencing contraction. In any case, the situation is dire enough that something must be done to revive the economy.
I explained on MSNBC and on the Leon Charney Report, which airs in the New York City area, that an economic recession is a bit like a patient who is having a heart attack. First the doctor treats the heart attack--usually with surgery and medication--then once the patient has been stabilized, the doctor addresses the long-term health issues. He might prescribe a change in diet and an exercise program. The goal is to make the patient healthier in order to reduce the odds that he will suffer another heart attack in the future.
From what I've been hearing so far, the Democrats' proposals address the heart attack. They are looking for ways to immediately revive the economy. But they are ignoring the long-term health issues. I'm not seeing anything on their table that would keep the economy healthy over the long term and reduce the odds of another recession.
The Republican candidates, on the other hand, are focused on the long term. They all want to reduce tax rates on individuals and corporations. Mike Huckabee is even proposing to eliminate the income tax entirely and replace it with a national sales tax. Lower taxes will certainly go a long way to ensure the long-term health of the economy, but they don't do much to address the immediate problem.
Yesterday, government officials announced agreement on a $150 billion economic stimulus package. They plan to mail checks to about 117 million families. They even proposed allowing Fannie Mae and Freddie Mac to temporarily purchase mortgages well above the current $417,000 limit. These proposals are well and good, but they merely treat the heart attack. They don't do anything to ensure the economy's long-term health. Hopefully, the Senate will add such measures before a final bill reaches the president's desk.
I know that not everyone believes we are actually in a recession, but whether we are or aren't is also largely irrelevant. The fact is that economic growth has slowed tremendously and some regions of the country are experiencing contraction. In any case, the situation is dire enough that something must be done to revive the economy.
I explained on MSNBC and on the Leon Charney Report, which airs in the New York City area, that an economic recession is a bit like a patient who is having a heart attack. First the doctor treats the heart attack--usually with surgery and medication--then once the patient has been stabilized, the doctor addresses the long-term health issues. He might prescribe a change in diet and an exercise program. The goal is to make the patient healthier in order to reduce the odds that he will suffer another heart attack in the future.
From what I've been hearing so far, the Democrats' proposals address the heart attack. They are looking for ways to immediately revive the economy. But they are ignoring the long-term health issues. I'm not seeing anything on their table that would keep the economy healthy over the long term and reduce the odds of another recession.
The Republican candidates, on the other hand, are focused on the long term. They all want to reduce tax rates on individuals and corporations. Mike Huckabee is even proposing to eliminate the income tax entirely and replace it with a national sales tax. Lower taxes will certainly go a long way to ensure the long-term health of the economy, but they don't do much to address the immediate problem.
Yesterday, government officials announced agreement on a $150 billion economic stimulus package. They plan to mail checks to about 117 million families. They even proposed allowing Fannie Mae and Freddie Mac to temporarily purchase mortgages well above the current $417,000 limit. These proposals are well and good, but they merely treat the heart attack. They don't do anything to ensure the economy's long-term health. Hopefully, the Senate will add such measures before a final bill reaches the president's desk.
posted by Vahan Janjigian | 1:47 PM
10 Comments:
Well known heart attack remedies include bare metal and drug-eluting stents. But now there are studies showing these stents may not help, and in some cases make you worse off. And that's just the physical part. Financially speaking, heart surgery costs a lot of money. Some heart attack survivors, receive their bills wondering if they were better off dead.
Vahan, $150 billion sounds like a lot of money. 1) Is there any evidence showing this stimulus package will actually work? 2) Where is this money coming from? As we all know, money doesn't grow on trees. And if it did, we'd have a serious inflation problem.
$150 billion is about 1% of GDP. This kind of stimulus package does work, but not as well as some may expect. But it could boost GDP this year by about half a percentage point. That may be enough to keep us out of recession. As for where the money comes from, it comes from you and me. It's tax dollars being shifted from some people to others. That's normally not a good idea. But the government is hoping that the people it shifts the money to will have a greater propensity to spend it.
How about balancing the budget and getting rid of the $9.2 trillion ($9,200,000,000,000) in government debt before we slash taxes permanently?
Balancing the budget is a great idea, but don't confuse tax cuts with lower tax revenues. We have a budget deficit because of excessive spending, not because of lower tax revenues. Tax revenues went up when the Bush tax cuts went into effect. When tax rates are high, a cut in rates usually produces more revenues. If we don't cut spending, we will need more tax revenues, not higher tax rates.
Let me phrase it differently - I'm a small government guy and would love to have as little in the way of taxes as possible. But at the simplest level, we have a deficit because we have excessive spending relative to revenues. If spending was $2 and revenues were $1, I'd say we have excessive spending too...
Point being, we aren't in a position to continue running deficits - we need every dollar we can get - and that needs to be changed yesterday, not after $150 billion here and there. What really needs to get done to save us "in the long run" is to right the revenue-spending imbalance and get rid of the national debt. Take away a little bit of politics from the argument, and it becomes the right thing to do...
James, it seems we are 99% in agreement. The only question is would tax cuts boost tax revenues or decrease them? As long as tax rates are above some critical level, tax cuts will boost tax revenues because the so-called wealthy will invest more and will realize more taxable income. That investment will also promote job growth, thus boosting tax revenues even further. My opinion is that tax rates are still above that critical level, so cutting rates should result in more tax revenue. Of course, our politicians may decide to use that extra revenue unwisely. spend that extra revenue rather than cut spending and paying down debt.
o.k., this comment from a liberal democrat... i have nothing against tax cuts if the government is well run and spending is under control. neither party has shown any discipline on spending. the republicans have been especially poor stewards of fiscal policy. George W. Bush allowed the republican congress to have every penny of pork barrel spending that they jammed into the budget. as president, he mismanaged the government and the war in iraq so as to put this country into a deficit which won't be cleaned up for a generation (and that assumes good management in the future, a big "if")... at this point, there will have to be sacrifice in order to get back where we belong. that means a combination of higher taxes and less spending... and if the economy suffers as a result, then that will have to be part of the sacrifice. we'd all love it if we could cut taxes, cut spending, and have a booming economy while still supporting all the social programs that are already in place (not to mention some kind of healthcare solution), but that's not going to happen. so the U.S. had better start making some hard decisions which includes ending the unnecessary war in iraq and less policing of the world. if we don't stop pouring money into the bottomless pit of our domestic social programs and misguided foreign adventures, we will feel the brunt of crushing debt and inflation in the not so distant future and these tough decisions will be made for us. we need action now on all fronts. republicans will have to swallow higher taxes and smaller military expenditures while democrats will have to accept adjustments to social security and a streamlined medicare/medicaid (ideally replaced with a universal plan that relieves employers from the burden of healthcare so that they can compete better in the future.) o.k., i'm stepping down from my soapbox... enjoy the weekend!
You're not as liberal as you think. Like me, you are for cutting spending. I completely agree that spending is out of control. But the solution to the deficit is not a combination of higher tax rates and lower spending. It requires higher tax revenues and lower spending. The point I'm making is that everytime Republicans cut taxes, tax revenues rise. We have a deficit because of excess spending, not because of insufficient tax revenues. Can't wait to see you on the soccer field!
tax revenues rose during the bush years because the federal reserve cut interest rates to a ridiculously low level and the u.s. consumer unleashed a debt-fueled buying spree. simultaneously, the housing market took off fueled by the same low interest rates and financial innovation (with a lack of regulation and lowered lending standards) that allowed people to buy (and furnish) homes that they couldn't afford as well as to do the cash-out refi ATM thing... i do not give the bush tax cuts credit for the increase in revenues (with the exception of the one year tax moratorium on repatriated foreign profits for u.s. companies... this was a windfall for both u.s. companies and the treasury which collected a measly 5 pct instead of 35 pct on those funds.) debt in our country is so high now that it is being destroyed rather than repaid (i am referring to all the bank writedowns of bad mortgage debt.)
p.s. i am very liberal, just not on fiscal matters...
If you're not liberal on fiscal matters, you are not liberal.
Why weren't you watching the SuperBowl?
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